Graded Vesting
What Is Graded Vesting?
Graded vesting is a vesting schedule that gradually increases an employee’s ownership of employer contributions to a retirement plan over time. Instead of receiving full ownership at once, employees gain partial ownership each year until they are fully vested.
This structure rewards employees for remaining with the employer over a longer period.
Why It Matters
Graded vesting allows employees to retain at least part of their employer’s contributions if they leave before becoming fully vested. It provides more flexibility than cliff vesting while still encouraging employee retention.
Understanding graded vesting helps employees evaluate how job changes might affect their retirement benefits.
How Graded Vesting Works
Under a graded vesting schedule, the employee’s vested percentage increases gradually.
Example:
- Year 1: 0% vested
- Year 2: 20% vested
- Year 3: 40% vested
- Year 4: 60% vested
- Year 5: 80% vested
- Year 6: 100% vested
If an employee leaves before becoming fully vested, they keep only the vested portion of employer contributions.
Graded Vesting vs Cliff Vesting
- Graded vesting increases ownership gradually.
- Cliff vesting grants full ownership at a specific milestone.
FAQs About Graded Vesting
Does graded vesting apply to employee contributions?
No, employee contributions are usually fully vested immediately.
Why do employers use graded vesting?
It encourages employees to stay with the company longer.
What happens to unvested contributions?
They may be forfeited if the employee leaves early.
Related Terms
